IRS Offers New Voluntary Disclosure Program for Offshore Bank Account Holders
On February 8, 2011 IRS Commissioner Douglas Shulman announced a new voluntary disclosure program forU.S. taxpayers with offshore financial accounts. The Offshore Voluntary Disclosure Initiative (OVDI) allows taxpayers with unreported income from offshore financial accounts to properly disclose the income to the IRS in exchange for reduced penalties. The program runs until August 31, 2011.
Taxpayers holding an interest in or signature authority over a foreign account have mandatory foreign bank account reporting (FBAR) requirements. The two most common FBAR filing requirements are: (1) indicating the existence of all foreign account(s) and reporting any income earned on their annual income tax returns, and (2) separately filing by June 30 of each year Form TD 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Other filing requirements may also apply, particularly if a corporation or trust is involved.
Taxpayers who fail to properly report their foreign accounts and pay taxes on income from such accounts could face criminal prosecution and civil penalties under the Internal Revenue Code far exceeding the amounts maintained in their accounts. By enrolling in the OVDI, a taxpayer may minimize the tax penalties asserted against them by avoiding or reducing the FBAR penalty provisions and other provisions pertaining to various information returns. Although the OVDI does not guarantee that criminal charges will not be brought, a cooperative voluntary disclosure greatly reduces the likelihood of criminal liability.
Under the OVDI, a taxpayer must disclose their offshore accounts for the last 8 years (2003 through 2010) by filing amended returns reflecting the unreported income and the corresponding FBARs. A taxpayer must pay the outstanding tax liability and interest for the applicable time period, and a penalty in-lieu-of all other ordinarily applicable penalties in the amount of 25% of the highest aggregate amount in the taxpayer’s foreign bank account. Additionally, if the highest aggregate value of the taxpayer’s foreign bank accounts between 2003 and 2010 is less than $75,000, the in-lieu-of penalty is reduced to 12.5%. Account holders who inherited an offshore account may be eligible for a 5% in-lieu-of penalty, depending on their circumstances.
In order to participate in the OVDI, a taxpayer must meet all the OVDI requirements (including submission of, all amended returns, FBARs and foreign account statements), by August 31, 2011. Taxpayers also must either make payment of all tax liabilities and penalties stemming from their disclosure or make good faith arrangements to pay such by this date.
The announcement of the OVDI program follows WikiLeaks’ announcement on January 17 that it intends to disclose the foreign bank account information of over 2,000 foreign bank account holders. Consequently, WikiLeaks may provide to taxing authorities the identities of previously unknown foreign account holders. A taxpayer who considers his or her name may be included should carefully consider acting sooner rather than later on the OVDI.
A taxpayer’s eligibility for the program depends on their circumstances. Taxpayers already under exam are not eligible for the new OVDI. Taxpayers who have not previously disclosed or taxpayers who disclosed under the normal IRS voluntary disclosure procedures are eligible to enroll in the OVDI. Any taxpayer wishing to participate in this initiative should immediately contact a tax professional, both a CPA and an attorney, in order to determine whether disclosure is necessary, ensure that they meet the August 31, 2011, deadline, and to protect the taxpayer’s rights. Andreozzi Bluestein LLP can provide legal counsel needs regarding these foreign accounts and the OVDI compliance initiative.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decision of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult an independent licensed attorney before making any decision or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Andreozzi Bluestein LLP and the recipient.
Any links to other web sites are not intended to be referrals or endorsements of these sites. The links provided are maintained by the respective organizations, and they are solely responsible for the content of their own sites.